Topic: Value Chains

Introduction

The value chain is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller: Competitive Advantage: Creating and Sustaining Superior Performance.
The Value Chain Approach can be applied to drive economic development and poverty alleviation through the integration of Micro and Small Enterprises (MSEs) into value chains. The idea behind the Value Chain Approach is that by influencing the structures and dynamics which define a value chain as well as improving/upgrading MSEs products and processes, MSEs can contribute to and benefit from a value chain’s competitiveness.

Definition

Value chains encompass the full range of activities and services required to bring a product or service from its conception to sale in its final markets and beyond (when recycling processes are taken into account). The activities constituting a value chain can be contained within a single firm or divided among different firms, as well as within a single geographical location (local) or spread over wider areas (national, regional or global). At each stage or activities of a chain a product gains some value. Value chains include input suppliers, producers, processors and buyers. They are supported by a range of technical, business and financial service providers.

Photos: The mohair value chain in South Africa: from the farm to the fashion show

A firm's value chain is part of a larger stream of activities, which Porter calls a value system. A value system, or an industry value chain, includes the suppliers that provide the inputs necessary to the firm along with their value chains. After the firm creates products, these products pass through the value chains of distributors (which also have their own value chains), all the way to the customers. All parts of these chains are included in the value system. To achieve and sustain a competitive advantage, and to support that advantage with information technologies, a firm must understand every component of this value system.

Value chains have both structural and dynamic components. The structure of the value chain influences the dynamics of firm behaviour and these dynamics influence how well the value chain performs.

Key Issues

MSEs in a value chain face problems often more forcefully than bigger enterprises. Limited resources and capacity make it difficult for small enterprises to become suppliers to larger firms, compete in value chains and enter higher-value markets. While large firms can often use their bargaining power in their supply chain, small enterprises need to follow the decisions taken by others. Often they have no other choice than to accept prices or product requirements that are given by a buyer.

Collective action organisations (such as business associations and cooperatives) can play a key role in helping enterprises and producers to address value chain requirements. They can facilitate and leverage market linkages for MSEs, improve their bargaining power and access to market information. For instance, joint purchasing, financial and other activities enable organisations to achieve economies of scale that cannot be achieved by single firms. Members of collective action organizations can potentially benefit from networking, collaboration and joint initiatives. Collective action organizations are often members of and thus linked to a bigger structure such as a cooperative union, a federation or a chamber of commerce. The graphic below presents the vertical and horizontal dimensions of economic benefits resulting from the formation of collective action organisation within a value chain.

Source: Emilia Saarelainen and Merten Sievers (2011): ILO Value Chain Development Briefing paper 1: Combining Value Chain Development and Local Economic Development, see list of recommended readings below.

Example of horizontal linkages

Horizontal activities include grouping together to increase small producers´ bargaining power and therefore, strengthening their position in the value chain. Joining forces can result both in a more stable and profitable relationship with intermediary buyers as well as help producers getting access to cheaper inputs when by pooling their purchasing power and buying in bulk. Collective action organizations can also be active players in trying to influence the business environment under which they have to operate. The organisation can not only represent its members vis-a-vis buyers but also towards local and national government and play an advocacy role, exercising influence on rules and regulations that might affect the operations. The organisation can give enterprises a chance to participate in decision-making processes and also help with new regulations. Many organisations, especially cooperatives, do also provide finance and business services to their members. Alternatively they can help in linking up to existing financial institutions and business service providers to collectively get a better deal for services provided to members.

In summary, horizontal linkages can benefit MSEs in many of the following ways:

  • facilitate bulk purchasing of inputs and services
  • reduce transaction costs for buyers
  • increase bargaining power of smallholders
  • promote collective learning
  • enable risk sharing
  • influence the creation of industry standards
  • catalyse the implementation of marketing strategies and provide access to new markets (for smallholders who cannot sell individually, but can do so as a group)
  • encourage firms to advocate for change
  • pool resources to purchase expensive shared equipment or services
  • supply large quantities demanded by buyers and importers

Critical Success Factors

1. Interventions must be market driven

In general, practitioners agree that value chain development projects must be market driven. Clearly, producing something for which there is no demand, will not lead to sustainable increases in income.

  • Use proven market research tools to conduct in-depth end-market analysis.
  • Use quantitative and qualitative information to understand opportunities in various market channels as well as the constraints to exploiting those challenges.
  • Segment the market: Analyse each of the potential end markets to understand the requirements, risks and expected benefits of competing in each of them.
  • Include value chain stakeholders in the analytical process to the extent possible.
  • Help value chain stakeholders to respond to and anticipate market trends.
  • Communicate the results of the analysis to industry stakeholders to help them select multiple potentially profitable markets.
  • Base the project’s design and interventions on up-to-date market analysis.
  • Use an incremental approach where there is resistance to change and/or low levels of capacity.
  • Understand that value chain actors are not only market driven.

2. Implementers need flexibility to respond to dynamic markets and contexts

While a high-level strategy to translate market analysis into action may always be needed, it needs to be acknowledged that market systems are dynamic and that projects need to be able to respond to changes in the often unstable environments in which we work.

  • Use value chain analysis to co-develop with industry stakeholders a vision (or multiple visions) of a more competitive industry.
  • Work with firms and groups of firms to develop roadmaps for achieving competitiveness.
  • Continually monitor responses to project interventions and adjust interventions accordingly.
  • From donors, implementers need flexibility to change course during value chain development projects.
  • Donors and implementers need to be willing to take risk and acknowledge failure.

3. Implementers should facilitate—rather than drive or replace—the actions of stakeholders

An increasing number of practitioners agree that projects should facilitate upgrading by industry stakeholders, using market actors to ensure the provision of goods and services to enable this upgrading, rather than directly providing such goods and services. Facilitation generally translates into a role for projects that minimizes and hides subsidy, ensures local ownership, and strengthens inter-firm relationships that advance value chain competitiveness.

  • Facilitate the delivery of goods and services by market actors rather than directly providing them, whenever possible.
  • Design interventions to create a permanent shift in the behaviour of a large number of firms.
  • Build local capacity to respond to dynamic markets.
  • Use incentives to catalyse broader change without negatively distorting markets.
  • Maintain a low profile to avoid creating dependency on project support.
  • Sacrifice short-term results for long-term sustainable results.

4. Implementation best practices for value chain development projects

  • Build local capacity to respond to dynamic markets.
  • Use incentives to catalyse broader change without negatively distorting markets.
  • Maintain a low profile to avoid creating dependency on project support.
  • Sacrifice short-term results for long-term sustainable results.

5. Implementers should catalyse behaviour change

There are various methods used by practitioners to promote new behaviour by firms that leads to increased value chain competitiveness. Some practitioners advocate a “therapy” approach that allows stakeholders to discover solutions for themselves while others promote driving change through lead-firm interventions. Some implementers seek to shift rural communities toward commercially oriented behaviour by creating relationships with input suppliers or buyers. Still others seek to empower stakeholders through participatory value chain analysis or to demonstrate competitive-ness by building business models or arranging study tours.

  • Identify models of competitive behaviour to stimulate stakeholder interest.
  • Use participatory tools to allow stakeholders to identify the incentives that drive observed behaviour.
  • Design interventions that leverage incentives for behaviours that support value chain competitiveness.
  • Identify and engage change agents.
  • Consider using a self-selection process for project partners.

The information on critical success factors is taken from: Ruth Campbell (2010): Implementation Best Practices for Value Chain Development Projects, USAID. See list of recommended readings below.

Practical Knowledge

Theoretical Knowledge

Title & Detailssort descending User Ranking Popularity
2013 World Investment Report
Author(s): UNCTAD
Year: 2013
Format: Report
2
Average: 2 (4 votes)
2,209
Analysis and Quantification of the South African red meat value chain
Author(s): 2011
Year: David Cornelius Spies
Format: Study
1
Average: 1 (4 votes)
5,062
ILO Value Chain Development Portfolio Analysis: A stocktaking of ILO value chain related activities
Author(s): Dalia Nunez, Merten Sievers
Year: 2011
Format: Study
0
No votes yet
801